Terry May Catch Tax Refund Fallout In '93

John Goolrick

For Mary Sue Terry, attorney general of Virginia, a ticking time bomb may eventually explode and give potential opponents more powerful ammunition should she run for governor in 1993.

Although Terry issued a statement calling recent U.S. Supreme Court rulings in two tax cases "good news for Virginia taxpayer," the consensus of legal opinion is that the rulings may portend a fiscal disaster for the state.

The high court has yet to decide whether Virginia will have to refund nearly $400 million in state income taxes to federal and military pensioners and whether it ever does will depend on the outcome of current litigation.

Yet a majority of the court in the two rulings seemed to send a signal that its sympathies would lie with the federal retirees whose taxes were unconstitutionally collected.

In one decision, the Supreme Court said a Florida liquor tax that discriminated against out of state suppliers must be refunded to the aggrieved parties despite the state's contention it would have a disruptive effect on the budget.

In a second case, the court said the state of Arkansas should not be forced to repay taxes it collected from an unconstitutional law related to highway taxes.

Terry used the second case as the basis for her "good news" statement, but many legal scholars do not share that viewpoint.

They note the Florida case indicates the court wouldn't look favorably on Virginia's argument that repaying the $400 million would have a devastating effect on the budget. And they note, too, that in the case involving Arkansas, Justice Antonin Scalia, part of the 5-4 majority, said decisions in general should be applied retroactively but that he would not do so this time because he disagreed with the original ruling striking down the highway tax.

The Virginia situation resulted from a Supreme Court decision invalidating provisions in 23 states that allowed taxation of federal pensions while exempting state and local retirees.

Virginia called a special session of the legislature and changed the law to treat all pensions equally.

Even so, federal retirees filed a lawsuit asking for refunds of back taxes from 1985 to 1988. The retirees lost a decision in Alexandria Circuit Court and have appealed to the Virginia Supreme Court with the possibility the case could eventually go to federal courts.

Terry is not only defending Virginia in the case but has been the subject of intense criticism for not warning Gov. Gerald L. Baliles and legislators about the damaging fiscal impact that might result if the Supreme Court struck down the state law.

While Terry has contended she closely followed the litigation that resulted in the ruling, Republicans and some Democrats have disagreed sharply.

They have termed the tax case the most glaring example of Terry's inability to manage the state's chief legal agency. And if Virginia is made to pay back the $400 million, a sum that would create budgetary havoc, Terry could be certain to catch the fallout if she runs for governor, as expected, three years hence.

Of course, Terry may yet prove the skeptics wrong if courts rule in time that Virginia doesn't have to pay back the millions unlawfully collected.

But attorneys for the federal retirees bringing the lawsuit were elated at the recent rulings, particularly Justice William J. Brennan's majority opinion in the Florida case that said if states force taxpayers to promptly pay taxes, even if taxpayers contend they are illegal, the due process clause "obligates the state to provide meaningful backward-looking relief to rectify any unconstitutional deprivation."

Such a huge paycheck would wreak havoc with state finances which aren't nearly as rosy as they used to be because of the general economic slowdown.

Trying to put blame on Terry for what the Supreme Court wrought might be unfair since the lawsuit to declare the state's practice of exempting certain pensioners while taxing others had been brewing for years. Certainly, the governor and key legislators should have known a decision would be eventually coming down even if the attorney general's office didn't give them regular reminders.

In politics, though, blame that properly should be spread more broadly is often focused on those who seek political office. Thus, a ruling adverse to Virginia could conceivably be used against Terry either by an opponent for the Democratic nomination or a Republican opponent in the general election.